At a total cost of $6,290,000, Herrera Corporation acquired 161,000 shares of Tran Corp. common stock as a long-term investment. Herrera Corporation uses the equity method of accounting for this investment. Tran Corp. has 700,000 shares of common stock outstanding, including the shares acquired by Herrera Corporation.

Required:

A.

Journalize the entries by Herrera Corporation on December 31 to record the following information (refer to the Chart of Accounts for exact wording of account titles):

1.	Tran Corp. reports net income of $753,000 for the current period.
2.	A cash dividend of $0.40 per common share is paid by Tran Corp. during the current period.

B.

Why is the equity method appropriate for the Tran Corp. investment?